DeFi 丨How did YFI rise? How will it develop? -

DeFi 丨 How did YFI rise? How will it develop? New

Abstract: In less than three months, Yearn Finance has grown from a relatively obscure credit matchmaker to one of the main drivers of the DeFi market, with a capital scale of US$670 million (peaking at over US$1 billion) and is at the heart of the hottest trend in the industry today - yield farming. Yearn's dominance in yield farming is so convincing that some people use its token as a yield farming index. With the rise of YFI, it is worth thinking about the complex issues of Yearn's future value, impact, risks and opportunities.

In less than three months, Yearn Finance has grown from a relatively obscure credit matchmaker to one of the main drivers of the DeFi market, with a capital scale of US$670 million (peaking at over US$1 billion), and is at the heart of the hottest trend in the industry today – yield farming. Yearn’s dominance in yield farming is so convincing that some people use its token as a yield farming index. With the rise of YFI, it is worth thinking about the complex issues of Yearn’s future value, impact, risks, and opportunities .

Yearn.Finance aims to become the gateway to a number of revenue-generating products in the Ethereum ecosystem

The birth and rise of YFI

Before July 16, Yearn was a simple DeFi credit integration designed to optimize user profitability . It manages $8 million in assets, and its liquidity providers have earned a combined annualized profit of 10.58% since its launch in January. But most importantly, it has not issued a token.

The next day, July 17, everything changed. Andre Cronje, the founder of "yearn.finance", published a blog post titled "YFI". In order to transfer control of the yearn.finance protocol to his users, Cronje developed a plan for users to earn YFI by providing liquidity to Curve and Balancer pools. This may be the first real launch in many years, when Cronje did not allocate YFI tokens to himself, giving up any round of financing, team allocations, pre-mines, or anything like that. All YFI tokens were allocated to users of the yearn.finance protocol.

A few months later, the total market value of a so-called "completely useless token" reached $670 million, and led to a $770 million "yield farming industry" (nearly $1 billion at its peak). It earns about $20 million for token holders every year.

Industrializing Yield Farming

A long time ago, Compound launched its liquidity mining program, and speculators flocked in, with many calling it the DeFi farming revolution. Simply put, liquidity mining refers to the process of distributing tokens to users for using the protocol. The purpose of liquidity mining is to distribute control of the protocol and encourage its implementation. The community introduced the term "Yield Farming" because users put their capital into the work of the protocol to get tokens, analogous to farmers working in the fields to get harvests .

In the weeks after Compound Mining launched, yield farming was fairly simple. You invested your capital into one of several protocols that offered incentives in exchange for liquidity, and then started earning tokens. The first stage of yield farming was similar to a manual field farmer. Users had to define and understand each strategy before manually entering capital. But as more and more protocols ran liquidity mining programs, yield farming became more and more complex, and the process became more and more complicated for many users. In addition, due to the congestion of the Ethereum blockchain, gas fees rose sharply, and many retail investors stopped participating in yield farming. Everything changed when yearn.finance launched the v2 (second version) protocol and introduced yVaults.

The most effective idea of ​​yVaults is to present a two-way market, with fund providers on one side and strategy developers on the other. Strategy builders allocate users' capital, and capital providers choose the strategies they want to use. These strategies enable automated yield farming for users. With the launch of yVaults, potential farmers now only need to deposit funds into a yVault, and their capital will be automatically allocated to the best strategy. "Vaults" not only reduce the risk faced by users trying to understand the different possibilities of yield farming, but also alleviate their concerns about gas fees by sharing with other fund providers in the pool. As a result, Yearn.finance has become the largest yield farming project in the industry, doing cases that only mature users could participate in in the past.

Flow of funds

YFI is a challenging project. Its main products are Earn (loan optimization) and Vaults (Yield Farming optimization), as well as many different products in the field of insurance, exchange trading, leverage, venture capital, and liquidation in its roadmap . In addition, this token model is still being developed by consulting firms Delphi Digital and Gauntlet. However, it is important to understand how YFI currently makes money from its two main products Earn and Vaults, because they can give people an idea of ​​its future (from an economic perspective).

The economics are simple. YFI charges a fee of 5% of its managed funds, and if a user withdraws, a withdrawal fee of 0.5% is charged. The withdrawal fee applies to both Earn and Vaults products, while the management fee only applies to Vaults products. In particular, for custodial products, a fee is charged every time a withdrawal occurs (the sale of processed assets in exchange for underlying assets). After the approval of YIP-36, it was determined that part of the system fees would be used as operating funds each year, and 100% of the system fees were sent to its vault. YIP stipulates that the vault must maintain a buffer of the equivalent of 500,000 yuan, and all surplus rewards allocated to YFI are placed in the management pool.

Within a week of implementation, the vault had accumulated revenue of more than $463,000, and more than $21 million per year. Based on the market value of $390 million at the time, this means a price-to-sales ratio of about 20 times. Considering that the protocol has no costs except the income from the finance, it can also be regarded as a price-to-profit ratio.

YFI's profit-price ratio means that if all YFI holders stake, they will receive an annualized return of about 5% (only YFI holders who participate in the company's governance pool receive cash flow). Since about 12% of YFI is currently held in the pool (a large proportion of YFI is held in other pools), YFI participants can receive an annualized return of about 40%, which means a PE ratio of 2.4x. It is best to understand these ratios as a range. Currently, YFI holders who participate in the management pool can receive an annualized return of about 40%, but if everyone stakes, they will receive an annualized return of ~5%. 5% can be seen as a limit based on the current price and profit per token.

Market Trends

Yearn's yield farming strategy has been so successful that it has begun to seriously drive the market . It is important to understand that Yearn's Vaults not only automate users' strategies, but also unify them. So, some users will sell tokens, and some users will hold tokens because they like to hold or do not pay gas fees. It is better to say that all yVault users are doing one thing. And when this one thing is the systematic sale of tokens, it will have a significant impact on such tokens considering the managed token assets. The most recent example is CREAM, a decentralized lending protocol based on Compound, which recently launched a liquidity mining program. Since the launch of the YFI vault, the vault has increased its holdings of CREAM and sold profits to obtain additional YFI. Essentially, the strategy benefits from CREAM speculators who auction newly received CREAM tokens and transfer them into YFI.

The yCRV repository below shows what this process looks like from the inside. There are some differences with this repository, but the general logic is the same. Replace yCRV with YFI and YFII with CREAM, and the picture will be very similar.

With the implementation of yVaults, the Yearn system will collect an increasing share of total profits from all the most profitable yield farming as long as this trend continues. The question then is whether this is sustainable.

Sustainability

The main reason why Yearn can generate such high cash flow now is that it is very profitable . There is a reason for the high rate of return, and the reason is that it is supported by the enthusiasm for protocol speculation of the liquidity mining scheme. The reason why "farmers" can get a "rate of return" of three digits or even higher is because speculators continue to buy new tokens on exchanges. Simply put, speculators pay for the "rate of return" obtained by "farmers" .

It is unclear how long the enthusiasm for yield farming will last. It could easily last beyond next year, or it could end overnight. However, once interest wanes, token holders will need to find additional sources of funding. This could be due to increasing AUM to compensate for the lower "yield" or adding products to provide other sources of income for the Yearn system. Equally important to YFI token holders is the current usage of Yearn . Yearn's 5% fee means the highest rate among all DeFi protocols. This fee may be justified given the value Yearn provides to capital providers. Even Cronje himself believes that YFI token holders will not simply receive returns from capital providers.

Furthermore, under the current system, Yearn does not pay strategy writers for their work. This is like asset management companies not paying their portfolio managers. If Yearn acts as a decentralized asset management platform (some have likened it to a non-target/arbitrage-oriented automatic management platform), it will eventually have to compensate strategy developers, leading to increased costs.

YFI Outlook

Perhaps no project is more suitable than YFI to reflect the development of yield farming. Currently, YFI provides $7.3 million in liquidity rewards per day, which requires $2.6 billion per year. YFI has taken advantage of the yield farming trend.

However, while YFI is currently the leader in yield farming, it is not the only company vying for the "yield pie" . Not only have several (often questioned) YFI forks emerged in the market, but new yield farming aggregators such as APY.Finance and asset management platforms such as Set V2 will also intensify competition. In addition, as mentioned earlier, the current benefits of yield farming will not last forever. Speculators will eventually stop buying as many new tokens, which will lead to lower returns. Although the successful launch of Yearn's planned insurance, exchange, leverage and liquidation products may diversify YFI's revenue sources and provide option value for YFI holders.

At present, YFI remains one of the most exciting experiments in decentralized governance . The fair launch of YFI has created a large, diverse, and enthusiastic community who are very interested in the success of the protocol. Due to Cronje's professionalism and leadership, Yearn's product release speed is impressive. Few protocols can launch new products as quickly as Yearn. However, while things are relatively stable for Yearn at present, challengers are entering the market, and Yearn has many new products to launch, and the risk is far from zero. In the coming months, we will wait and see whether this nascent community can continue to work its magic to benefit all stakeholders.